YOUR MONEY; The Great Chase for the Highest Rate

By JANE BIRNBAUM

Published: October 13, 2007

They're a latter-day version of day traders. Rate chasers, they call themselves: savers who hunt for the best interest rates at banks and credit unions and quickly move their cash from one account to another.

Their forebears took the risky path of rapidly buying and selling stocks in the hope of locking in quick profits, but often suffered deep losses instead. The rate chasers, by contrast, consider themselves safety-conscious -- even the most extreme among them who are playing with money borrowed from credit cards -- because they are keeping their money in accounts that are federally insured.

''The millionaires have stocks and bonds, and they're chasing with their safety money,'' said Nick Ferris, a 24-year-old software engineer from Rockville, Md., who readily acknowledges that he is one of the more aggressive rate chasers, having borrowed money at 0 percent introductory rates from six credit cards. ''We poorer people who don't want to go bankrupt if the stock market crashes are more inclined to go rate chasing with all of our money because all of it is our safety money.''

Rate chasers used to be retirees on fixed incomes who scoured the newspaper to find tiny bumps in rates. ''It meant the difference between eating out or not,'' according to Jim Bruene, editor of an industry newsletter, Online Banking Report.

The current rate chasers are of all ages and means, although no one tracks their numbers and demographics. The stock market volatility this summer along with offers of 6 percent interest on liquid insured savings only served to underscore the rate chasers' conviction.

Like their day-trading predecessors, rate chasers are all online. ''Rate chasing has never been easier than in the last two years, because of the Internet and personal finance sites like Bankrate.com that have aggregated listings of providers chomping at the bit to get your business with the highest rates,'' said Edward Woods, a senior analyst at Celent, a financial services research and consulting firm based in Boston.

Greg McBride, a senior financial analyst at Bankrate.com, said, ''There's a big disparity between letting money languish in a low-yielding account at your typical brick-and-mortar bank where the average passbook savings account is less than 1 percent and the high-yield accounts, where they top 5 percent. ''

But, he added, ''whether it makes sense to chase every little change in rates depends on how much money you have to play with.''

The roots of online rate chasing go back to 1996, when NetBank, the first significant Internet-only operation, offered savings rates that were higher than any on a brick-and-mortar passbook account, so long as savers were willing to open an account at a bank with no physical branches. (The bank was shut last month by federal regulators after it ran aground with lending problems.)

Then, in September 2000, ING Direct, an online division of the Dutch banking giant ING Group, offered a 6.5 percent savings rate at a time when passbook accounts in the United States were averaging 1.66 percent, according to Bankrate.com. Although there were smaller online banks offering the same rate or a little more, ING Direct had the resources to pay for a huge national advertising campaign featuring a distinctive orange ball. And while ING Direct lacked the physical branches owned by its Dutch parent in Europe and India, it soon opened a Manhattan cafe where customers could sip coffee and log on to their accounts.

Today, the bank still has roughly half the $150 billion in online deposits in the United States, according to Mr. Bruene, even though it has not offered the highest rates in recent years.

Rate chasing really began to take off in January 2005, when the online bank Emigrant Direct came on the scene with a 3 percent savings rate, topping ING Direct, which was offering 2.35 percent at the time.

Emigrant Direct was helped by its affiliation with a brick-and-mortar institution in the United States, the Emigrant Savings Bank of New York. But it got a big boost when the personal finance guru Suze Orman endorsed the Emigrant Direct offer on her television show.

In March 2006, Citibank introduced its online brand, Citibank Direct, with a 4.5 percent savings interest rate. ''Citibank was the first nationally known brand name in the market,'' Mr. Bruene said. ''When it's Citibank, that gets the attention of every large bank. If they hadn't been thinking of starting an online brand before, they were then.''

Today, there are some two dozen major online-only banking brands in the United States, most of them divisions of regional, national and global banks, Mr. Bruene said. All use high rates to attract new customers to whom they can peddle more profitable products like checking accounts and loans.

''When banks choose to lower those high rates to improve their bottom lines, they do it knowing some customers -- namely, the rate chasers -- will move on,'' Mr. Bruene said.

FNBO Direct, the new online unit of First National Bank of Omaha, made a splash on May 1 when it introduced a five-month 6 percent promotional rate. The offer was timed to start just as the 6 percent rate at an online competitor, HSBC Direct, was expiring, the president of First National Bank of Omaha, Rajive Johri, said in an interview.